Telstra signs deal with NBN… so now what?

By Tony Brown

The announcement from Canberra came on a lazy Sunday afternoon when most of Australia’s movers and shakers were away from their desks – all except Prime Minister Kevin Rudd and Telstra Chairwoman Catherine Livingstone, who emerged from Parliament House to announce that they had finally struck a deal for Telstra to sell its fixed-line assets to the National Broadband Network Company (NBN Co.).

Under the terms of the proposed deal, the government will pay Telstra A$11 billion (US$9.7 billion) in a three-stage deal for its fixed-line network assets – excluding its HFC cable network – and its fixed-line customer base. The deal shaves about A$5 billion from the cost of deploying the NBN, taking the final cost to about A$38 billion.

More importantly, the deal also removes the prospect that Telstra will compete against the NBN in the broadband market and provides the NBN with its biggest and most lucrative customer.

But the fact that the deal has reached only heads-of-agreement status indicates that there are a lot of details to be resolved before it can be approved by Telstra shareholders and then put in front of the Australian Competition and Consumer Commission for final approval.

Still, the fact that we have reached this stage more than a year since the government and Telstra began their negotiations – which at times looked doomed to fail – is cause for celebration, though it might be a good idea to keep the champagne on ice for a while.

Where to now?

The key factors in the success of the NBN can be summed up in two words: execution and speed.

The Labor government has been bedeviled by bungled infrastructure programs and simply cannot afford to make a mess of the NBN rollout. It needs the rollout to be done as fast as possible and must avoid any cost blowouts or serious implementation bungles, since the political consequences would be dire.

The speed of the rollout is crucial, because the Liberal and National opposition parties have already vowed to dump the entire NBN project if they win the next federal election, which is likely to be held by end-October.

At the moment, the Labor Party is favored to win a second term of government, which would give the NBN a desperately needed lifeline, but the progress of the network in the Labor government’s second three-year term will be critical if it is to survive and reach its goal of providing 100Mbps access to 90% of Australian homes.

If during Labor’s second period of government in 2010-2013 the NBN is able to cover a significant number of homes – let’s say 30% – it would be hard for any incoming Liberal/National government to junk the network’s implementation since it would effectively leave the nation with a two-tier broadband market of NBN and non-NBN areas, which would be a political embarrassment.

But if the NBN Co. failed to make serious progress with the rollout of the network before the 2013 election, an incoming Liberal/National government would find it far easier to scrap the project – though they have said they would honor all contracts between the NBN Co. and vendors for network deployment.

Telstra left pondering

The proposed deal is clearly great news for the government, which now finally has another solid achievement under its belt to aid its looming election campaign. But what of Telstra?

Well, now that the deal has been agreed on – albeit with details still to be ironed out – Telstra can be relieved that its long ordeal is nearly over and that a massive cloud of regulatory uncertainty has been lifted from the company.

Sure, Telstra will cede its near-monopoly position as a fixed-line-network operator once the NBN is established, but in the broader picture the firm has a clear migration plan away from its aging copper network.

What’s more, Telstra will even be able to continue cashing in on its copper networks until the NBN is fully rolled out – a process likely to take at least eight years and possibly even longer.

But once the NBN is up and running, Telstra will have to change its mentality and organize a transition from being a network-centric market giant to being just another player on the NBN alongside other service providers, such as Optus, Internode and Primus.

This will essentially mean that Telstra must change its business model and focus on providing new and attractive services on the NBN. Its services will almost certainly focus on video content initially – making its 50% ownership of pay-TV-market leader Foxtel a crucial factor in its success – though the firm will then have to explore a wider range of services.

Although Telstra is losing its network dominance, it will still be a giant in the fixed-line market even after the NBN comes online. Its numerous retail outlets and deep pockets provide it with huge market power, and despite some high-profile PR gaffes in recent years the firm still has a decent reputation.

The key will be how quickly and effectively Telstra is able to identify and launch services on the NBN that will help it gain revenue to replace the rivers of gold that used to flow from its fixed-line businesses but have been dwindling despite the arrival of broadband in the market.

Telstra now needs to find new partners in the industries that are going to be the key sources of revenue over the NBN – such as health care, security, digital advertising and IT – and start working on delivering new services that are going to attract attention from both corporate and residential users.